Interest rates are an important part of producing loans for companies, but it can be difficult to determine the correct rate for each individual. By looking at historic data and different metrics, conclusions can be made about how each indicator impacts the interest rates as well as the importance of these in the evaluation of interest rates. It is important to look at different years so the evolution of interest rates can be evaluated with respect to time. 

In Figure 1 the correlation between numeric features was evaluated in a heatmap to help determine if there was anything interesting to explore more as something that potentially has a high impact on interest rates. The highest correlation came from ORIG_UPB which is the amount of money owed on the loan and CSCORE_B which is the credit score of the borrower. This seemed to be intuitive, so the decision was made to focus on other factors so as to find out new information beyond surface level. Thus the decision was made to focus more on credit scores (which had a weaker correlation than was expected) for numeric values.

The next step was to look at the distribution of both current and original interest rates over the two years sampled (2007 and 2019) in Figure 2 to see if there are any significant differences. The first thing noticed is that interest rates as a whole are lower in 2019 by at least 2%. The current interest rates in 2007 were the most spread out (ranging from 0 to above 7.5) while the others appeared to have similar spread. Also there appears to be a greater difference in current and original interest rates in 2007 compared to 2019 where they appeared to be very similar.

Figure 3 depicts the average interest rate after each loan was placed into one of five categories based on how long the loan had been around. This is important to be able to see if there is a difference between interest rates as the loan ages. In 2007, the interest rate decreased as the loan got older while in 2019 the interest rate generally increased or stayed the same as the loan got older.

For the credit score of both borrower and co-borrower, a scatter plot was made of current interest rate and credit score in Figure 4. Both of these plots show a negative relationship, so as the credit score increases, the interest rate decreases, which makes sense. What was surprising though was how weak the relationship was between these two variables, this goes to show that there is a lot more that goes into interest rate calculation than credit scores.

After this, the relationship between purpose and current interest rates were investigated in Figure 5. There were three different purposes that each loan was categorized into, and a box plot of the distribution of each purpose was generated in the plot. The refinance with no specific reasoning (R), was positively skewed, had the lowest median interest rate and the most spread. The cash-out refinance category (C), was negatively skewed and had the highest median interest rate. 

Finally in Figure 6, the relationship between debt-to-income ratio and current interest rate was explored. Overall there does not seem to be a significant relationship between these variables which suggests that this factor is not taken into greater consideration when determining the interest rates.

In conclusion, a lot of factors go into determining the correct interest rate for each loan, but generally a lower interest rate will go to individuals with a higher credit score, with a general refinance purpose and a loan of less than 5 years old. If the company was looking to make their profit as high as possible through interest rates, they should target those with lower credit scores looking for a cash-out refinance.

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Figure Appendix


Heat map

Figure 1: Heat map


Box Plots of Original and Current Interest Rates in 2007 & 2019

Figure 2: Box Plots of Original and Current Interest Rates in 2007 & 2019


Figure 3: Average Interest Rate by Loan Age and Year


Credit Score vs Current Interest Rate

Figure 4: Credit Score vs Current Interest Rate


Figure 5: Box Plots of Current Interest Rates for Different Loan Purposes


DTI vs Current Interest Rate

Figure 6: DTI vs Current Interest Rate